Review of the water charge rules Australian Competition and Consumer Commission

Local Government Association of Queensland

4 March 2016

Submission – March 2016 Review of Water Charge Rules

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The Local Government Association of Queensland

The Local Government Association of Queensland (LGAQ) is the peak body for local government in

Queensland. It is a not-for-profit association setup solely to serve councils and their individual needs.

The LGAQ has been advising, supporting and representing local councils since 1896, allowing them to

improve their operations and strengthen relationships with their communities. The LGAQ does this by

connecting councils to people and places that count; supporting their drive to innovate and improve service

delivery through smart services and sustainable solutions; and delivering them the means to achieve

community, professional and political excellence.

Scope of Inquiry

The LGAQ appreciates the opportunity to provide comment on the Australian Competition and Consumer

Commission’s (ACCC) proposed amendments to the water charge rules to address the issues identified by

the May 2015 Review of Water Charge Rules Issues Paper.

The Association acknowledges the value of submissions provided from individual Queensland councils

which are best placed to provide advice about their individual circumstances. This response is therefore

limited to providing a general overview of the issues relevant to Queensland local government.

Summary and Recommendations

This submission primarily reflects the position of local governments in Queensland as water users within

the Murray-Darling Basin. SunWater is the key water infrastructure operator within the Murray-Darling

basin, and has contractual relationships with several Queensland local governments for the provision of

bulk water. While there are existing oversights of water prices in Queensland by the Queensland

Competition Authority (QCA), the prices of bulk water paid by local governments (as urban water

customers) have not been considered specifically in any of the QCA reviews of SunWater.

The LGAQ is broadly supportive of the Draft Advice and proposed changes to the Water Charge Rules.

The following points are made in regards to the Water Charge Rules:

Local government does not support additional and unnecessary regulation by Federal agencies.

Indeed, the regulation of water is a Constitutional responsibility of the State not the Federal

Government; but the ACCC can and should play a role in establishing good governance principles

and defining best practices.

Local government supports principle-based pricing, and notably non-discriminatory pricing to

ensure that no community is substantially disadvantaged in terms of basic access to, and price of a

reasonable supply of water.

While the changes to rules seek to find a balance between transparency and the cost of engaging

with the community, the Association would seek to ensure that such information is available upon

request or included in other publications as relevant.

In the absence of a Queensland water pricing regulator as per the Water Charge Rules, the

implication of the proposed changes is that the ACCC would become the regulator for water

Submission – March 2016 Review of Water Charge Rules

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entities in the Queensland portion of the Murray-Darling Basin. The Association does not support

this situation, and suggests that the ACCC should seek to encourage and guide the Queensland

State Government in establishing an appropriate regulator, which is transparent in its application of

the Water Charge Rules and relevant pricing principles.

LGAQ Policy

LGAQ’s overarching Policy Statement 20151 is a definitive statement of the collective voice of local

government in Queensland which identifies how local government seeks to engage with and be recognised

by State and Federal governments. Several points within the Policy Statement are relevant to the current

inquiry as follows:

1.3.5 The Federal and State governments’ legitimate interests and jurisdiction responsibilities are for the

good rule and governance of the entire country and State respectively. In exercising this jurisdiction,

governments have the responsibility to set, regulate and enforce appropriate policies and standards for the

good of the entire community and which have national, state-wide and regional impacts and implications. In

doing so, Government regulates activities and functions which may involve local government. During the

development, regulation and enforcement of appropriate community standards, local government will not

be the specific focus of Government, even though in some areas of activity local governments may be the

sole providers or the only entities operating in this sector or area of activity.

2.2.2.5 There should be no interference with the autonomy of local governments in the setting of rates and

charges.

8.5.1.2 The State Government must ensure that no community is substantially disadvantaged in

terms of basic access to, and price of a reasonable supply of potable water, as a community service

obligation.

8.5.1.5 Local government believes that any change in current water institutional arrangements should seek

to build on existing roles, responsibilities and relationships reflecting the existing partnership approach

between the State and local governments and amongst local governments.

8.5.3.1 Local government accepts that significant local government water retailers should be subject

to price oversight by an independent body. However, retail water pricing must remain the responsibility

of each water retailer, recognising the varying circumstances that exist.

8.5.3.2 In setting retail prices, local government recognises the need for pricing regimes which encourage

efficient use of water resources. This will generally be achieved by use of two-part tariffs including,

where appropriate, inclining block tariffs.

8.5.3.3 Where separate institutional arrangements exist for bulk water supply within a region, a common

‘postage stamp’ approach to pricing is generally preferred by local government rather than one based on

differential nodal pricing.

1 Available at http://lgaq.asn.au/documents/10136/42feeabd-748b-4565-985f-6913ffad7a98

Submission – March 2016 Review of Water Charge Rules

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Queensland Local Government Context

Local Governments own and maintain a significant portion of Queensland’s infrastructure. According to the

ABS2 the total value of non-financial assets for both State and Local Governments in 2013-14 was $263.2

billion. Local governments’ portion of the total value was $89.2 billion (33.8%), compared to $44.3 billion

(37.4%) in 2004-05. Local Government assets include a range of infrastructure that supports many

services, some of which are essential to Queensland’s communities. These assets include local roads,

water supply and reticulation networks, drinking water and sewage treatment systems, stormwater

management, and parks – among others.

Of particular value to communities are the urban water and waste water services that are predominantly

the purview of local governments. All local governments are either registered water providers or are

shareholders in statutory authorities that deliver urban water services that service more than 300

communities. Thus, local government is directly responsible for the delivery of potable water and waste

water services to all of Queensland’s communities where they are provided.

Local governments in Queensland either source the water for their communities directly or secure it under

contract from a bulk water provider. As customers, just under half of Queensland’s local governments can

source water from the two major State-owned bulk water providers; SunWater, which has contractual

arrangements with 20 local governments; and Seqwater, which has contractual arrangements with 13

councils in Southeast Queensland. There are also two Category One Water Authorities, the Gladstone

Area Water Board (GAWB) and Mount Isa Water Board (MIWB). The GAWB supplies major industrial

customers in the Gladstone region and Gladstone Regional Council. The MIWB supplies Mount Isa City

Council, Mount Isa Mines, and Incitec Pivot. Councils in the southern part of Queensland also receive

water from the Dumaresq-Barwon Border Rivers Commission, which is a joint entity established in 1946

between the Queensland and New South Wales governments. In Queensland, the Commission operates

primarily in Goondiwindi Regional and Southern Downs Regional Councils, but extends into portions of

Toowoomba Regional and Western Downs Regional Councils.

Within the headwaters of the Murray-Darling Basin, water services are provided by eight local

governments, SunWater, and the Dumaresq-Barwon Border Rivers Commission (see Figure 1).

Regulation of water prices in Queensland

The Local Government Act 2009 regulates local governments in Queensland, and in particular their ability

to set rates and charges. The ability to charge for water services, as a utility charge, is given under section

94. In addition, the Act requires any local governments that are operating a ‘significant business activity’ to

comply with National Competition Policy Agreements and competitive neutrality principles. A business

activity is significant if it “is conducted in competition, or potential competition, with the private sector

(including off-street parking, quarries, sporting facilities, for example); and meets the threshold prescribed

under a regulation.” (s.43). The current threshold for combined water and sewerage businesses in

Queensland is $13.3M3 for operating expenditure in the previous financial year less depreciation and any

loan redemption payments – among other moderating factors. In the 2014-15 financial year there were 23

local governments that were above this threshold. Under the Financial Accountability Act 2009 the

2 5512.0 - Government Finance Statistics, Australia, 2013-14, Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 13/05/2015 3 Department of Infrastructure, Local Government and Planning, Bulletin 01/14. Available at: http://www.dilgp.qld.gov.au/newsletters-and-brochures/bulletin-01-14.html

Submission – March 2016 Review of Water Charge Rules

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Queensland Audit Office conducts annual audits of local governments to report on compliance with

legislative requirements and required accounting practices.

Figure 1 - Queensland Murray-Darling Basin Water Entities

For water services that have been declared a monopoly business activity4,5, Queensland’s main oversight

for water pricing is through the QCA. The QCA reviews water prices for bulk water and retail water entities

when they are directed by referral from the Minister (i.e. Treasurer), with each referral indicating the scope

of the review. To date the QCA has been directed to conduct more than a dozen reviews of water prices,

including both State-owned bulk water entities, the GAWB, and all of the Southeast Queensland retail

entities (all of which are owned or operated by local governments). The QCA, upon completing its review,

then makes recommendations to the State or Local Government as required, which may then choose

accept or reject them.

The only water entity within the Murray-Darling Basin that has been reviewed by the QCA is SunWater.

The last review of SunWater in 2012 was limited in its scope to only irrigation schemes, which mirrored the

scope of previous reviews. The Ministerial direction also excluded consideration of the value of the

Regulatory Asset Base when conducting the review. This review established price paths from 1 July 2012

to 30 June 2017 for the irrigation portion of the SunWater business only. Consequently, the prices of bulk

4 QCA Final Report “Criteria for deciding whether to declare a candidate water supply activity to be a monopoly water supply activity.” Available at: http://www.qca.org.au/getattachment/92f064f8-bfa1-454b-8c91-7d8d03fc6ee9/Criteria-for-the-Identification-of-Monopoly-Water.aspx 5 Under the Queensland Competition Authority Regulation 2007 (s 2A), the following are declared as monopoly business activities: Bundaberg Regional Council, Cairns Regional Council, Gold Coast City Council, Logan City Council, Mackay Regional Council, Queensland Urban Utilities, Redland City Council, Rockhampton Regional Council, Toowoomba Regional Council, Townsville City Council, Unitywater.

Submission – March 2016 Review of Water Charge Rules

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water paid by local governments (as urban water customers) have not been considered specifically in any

of the QCA reviews of SunWater.

Comments on the ACCC’s Draft Advice and proposed water charge rules

This submission reflects local government’s role primarily as a customer of an infrastructure operator, but

Queensland local governments in the Murray-Darling Basin in some instances are also infrastructure

operators. As stated in the Draft Advice, local government’s role as an infrastructure operator is largely

outside the scope of the ACCC’s Water Charge Rules because its function in this role is for the provision of

urban water supply activities. Where local government does provide services for irrigators or non-urban

water users, the services are typically incidental or in response to declared disasters such as drought.

The role of ACCC in regulating water prices As stated previously in the referenced extracts from LGAQ’s Policy Statement, local government in

Queensland believes that establishing appropriate policies and standards for good rule and governance is

a role of Federal and State governments. The ACCC’s work to establish and implement the Water Charge

Rules over the last few years are one example of the Federal government acting on this responsibility.

However, in line with the discussion in the Draft Advice, the Association would echo the call for measured

regulatory enforcement actions of the ACCC. Local government does not support additional and

unnecessary regulation by Federal agencies. Indeed, the regulation of water is a Constitutional

responsibility of the State not the Federal Government; but the ACCC can and should play a role in

establishing good governance principles and defining best practices.

As water pricing is relevant in the context of competition and impact on consumers, the Association

supports the work of the ACCC in defining water pricing principles and providing support in implementation

and interpretation of those principles. The Association supports the ACCC’s Draft Advice targets of efficient

and sustainable use of water infrastructure, facilitating effective water markets, improving transparency of

charging arrangements, and reducing the regulatory burden on the sector. The Association also supports

the Basin water charging objectives and principles.

The ACCC is not alone in proposing pricing principles. The National Water Initiative6 and the QCA7 have

each proposed their own pricing principles, and there should be agreement between them where possible.

The balanced and holistic application of all relevant principles should encourage more consistent

regulatory approaches. However, the principles must recognise that water prices are affected by

circumstances of the local context in which water services are provided. Thus, consistency of principle-

based pricing practices and not the final prices should be the ultimate goal.

Noting the above, the LGAQ supports the draft recommendations regarding the ACCC providing

additional guidance, support, and consultation in regards to the Water Charge Rules, and to

continue as a point of recourse in the implementation of the rules.

6 Natural Resource Management Ministerial Council, National Water Initiative (NWI) pricing principles. http://www.environment.gov.au/topics/water/australian-government-water-leadership/national-water-initiative/national-water 7 Queensland Competition Authority, Pricing Principles. Available from: http://www.qca.org.au/Water/Queensland-wide-issues/Water-Pricing-Principles

Submission – March 2016 Review of Water Charge Rules

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Non-discriminatory water pricing principles The LGAQ supports the expansion of Part 3, the application of non-discriminatory pricing

principles to all infrastructure operators. Non-discriminatory pricing should ensure that no community is

substantially disadvantaged in terms of basic access to, and price of a reasonable supply of water. While

the potential for discriminatory pricing practices is more obvious in member-owned water infrastructure

operators, the potential also exists for operators that are not member-owned.

Local governments, as water users in Queensland, are subject to differential pricing as a class of service

from SunWater based on the need for higher priority of access and greater reliability or security of water

services. In the QCA’s 2012 review of SunWater’s prices, it accepted SunWater’s proposed methodology

to allocate the cost of storage infrastructure (i.e. ‘headworks’ such as dams or weirs) based on the priority

of the allocation8. The Headworks Utilization Factor (HUF) was proposed as a superior option to the

existing Water Pricing Conversion Factors9. In effect, the QCA determined that the HUF better accounted

for the costs of the priority and reliability as a component of the infrastructure rather than the entitlement. In

general, this decision meant that a greater portion of the cost of infrastructure was allocated to high priority

water, which is primarily required by local governments.

The LGAQ accepts that priority of access and reliability or security are factors that can be used to define

different classes of service, which falls within a non-discriminatory approach to pricing. While the

methodology to calculate the HUF was accepted by the QCA and the Queensland Government, the

approach is inherently tied to the valuation of the storage assets, the Regulatory Asset Base, rather than

the real or reasonably estimated costs to provide the different classes of service. The Association

appreciates the consistent and reasoned approach to pricing found in the HUF methodology, but has

concerns because the review process excluded consideration of the Regulatory Asset Base as well as the

impact of the decisions on the water prices of urban water customers (i.e. the QCA was only directed to

review irrigation prices). The Association is currently working with the Queensland Government and

SunWater to address these issues.

For local governments as infrastructure operators, pricing is also affected by community service obligations

or policies that are implemented to encourage various social objectives. The non-discriminatory principles

as currently described do not appear to consider these additional social factors. For example, a local

government may offer concessions to pensioners based on the ability to pay for a critical service like

potable water. Conversely, a local government may offer incentives for behaviours that are seen as

beneficial, such as water conservation or efficiency. On the surface these price adjustments could be

interpreted as discriminatory pricing as the water charge is different based on the customer or the

behaviour and not the actual cost of the service. Arguably, these practices are more relevant in the context

or urban water activities, which are excluded from consideration in the Water Charge Rules. However,

these practices should be viewed as non-discriminatory where they are transparent, adjustments are made

after the charge has been disclosed, and they are necessary for the good of the community. Pricing

practices based on defined community obligations and social policies should still encourage efficient use of

water resources.

8 Queensland Competition Authority, Final Report: SunWater Irrigation Price Review: 2012-17, Volume 1: Section 5.10 - Allocation of Headworks Renewals Costs According to WAE Priority. Available from: http://www.qca.org.au/getattachment/5fad8dc9-2101-4097-bdc8-d90d25fbfbbb/SunWater-Irrigation-Price-Review-2012-17-Volum-%281%29.aspx 9 The Water Price Conversion Factor was an estimation of the equivalent value of high priority water with a lesser priority water (e.g. medium priority). For example, if a correction factor was 1.5, 500ML of high priority water would be equivalent to 1500ML of medium priority water. The factor was used to determine the new allocation of water should a user wish to convert its priority, and was used to calculate prices. Factors were only calculated for some of the schemes and were never fully implemented across all schemes.

Submission – March 2016 Review of Water Charge Rules

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Transparency in water pricing The LGAQ also supports the proposed changes that seek to improve or enhance the transparency

of water pricing. The requirements of Part 4 (Schedule of Charges) and Part 5 (Network Service Plans)

have helped to make water prices more transparent in Queensland. SunWater in particular has

implemented the requirements of these rules and published this information on its website. While not

required under the Water Charge Rules, local governments are also required by legislation to publish a

schedule of rates and fees similar to the Schedule of Charges, which includes the prices for water and

sewerage services.

The proposal to remove the Network Service Plans as a requirement should ensure that transparency is

maintained, especially noting that bulk water pricing for local governments in Queensland that have

contracts with SunWater have not been part of the QCA reviews. The Association would seek to ensure

that such information, if not required to be published or communicated to customers, is available upon

request or included in other publications as relevant.

Notwithstanding the need for transparency, the Association also supports the comments made by others in

the Draft Advice regarding the costs in correspondence and engagement with customers in providing

pricing information. Such costs should not place an unreasonable burden on operators, or affect the prices

of customers through additional unnecessary costs passed on by operators.

Approval or determination of regulated charges

As previously discussed, the LGAQ does not support the extension of ACCC powers into water

regulation that is already clearly established for the States. The Association believes the ACCC’s role

should be in mediating disputes between States, and in providing clear guidance and support for a

framework of water charging based on sound principles. Where other services potentially have a national

interest that may support a case for a broader role of the ACCC, such as a national electrical grid or road

network, water is fundamentally a local service. Issues about water schemes in most instances fall within

defined regional areas, and the Murray-Darling Basin is a significant exception where the issues cross

State boundaries. However, even in cross-jurisdictional matters the costs and benefits of dual economic

regulation should be strongly considered.

Therefore, the LGAQ supports the position in the draft advice, that States should be the regulators for

water prices under the Water Charge Rules in the first instance. However, this change pre-supposes that

all of the States have appropriate regulators in place, which is questionable in Queensland based on the

current proposed revisions to the Water Charge Rules (Rule Advice 5-M). In particular, while the QCA

reviews water prices, they do not have deterministic powers and must defer to the State Government to

implement their advice. In practice the advice by the QCA has always been implemented.

In the absence of an acceptable Queensland water pricing regulator, as per Rule Advice 5-M, the

implication is that the ACCC would become the regulator for water infrastructure operators in the

Queensland portion of the Murray-Darling Basin. The Association does not support this situation, and

suggests that the ACCC, in line with the Draft Advice statement that the “…Commonwealth’s role be

redirected away from determining an operator’s overall revenue requirements…” should seek to encourage

and advise the Queensland State Government in modifying current regulation to satisfy the Water Charge

Rules. Working with the Queensland Government, potentially through altering the role of the QCA, would

avoid duplication in regulatory effort by the ACCC.

Changes to the role of QCA as a regulator have been considered in recent years. For example,

deterministic powers for pricing were proposed in the Revenue and Other Legislation Amendment Bill

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201410 (Part 6, clause 63) that was tabled in the Queensland Parliament. This bill lapsed as a

consequence of the dissolution of the Legislative Assembly in January 2015, and has not been taken up

again by the new Government.

As mentioned previously, the QCA currently has oversight over declared monopoly business activities for

both bulk and urban water services. Any alterations in the current arrangements of the QCA as a regulator

may affect both bulk water and retail water prices, which may also have consequences outside of the

Murray-Darling Basin in Queensland. The Association urges careful consideration of the consequences of

establishing a water pricing regulator or modifying the role of the QCA to meet the requirements of the

Water Charge Rules. The LGAQ does not support giving powers to the QCA (or any similar entity) to

determine local government water prices.

Contacts and References

Should further information on any aspect of the Association’s response be required, please don’t hesitate

to contact Mr Arron Hieatt, Principal Advisor for Water and Sewerage Infrastructure on 3000 2237 or

arron_hieatt@lgaq.asn.au

10 Available from: https://www.legislation.qld.gov.au/Bills/54PDF/2014/RevenueOLAB14.pdf